Will the housing market keep cooling off? Experts weigh in

The housing market is headed in the right direction

Housing inventory was so sparse over the last two years that it’s been described as everything from a desert to a “Soviet-era supermarket.”

But the tides started to turn in 2022. As mortgage rates surged, home buyer demand lessened, opening a window of opportunity for buyers. This led to some much-needed inventory gains, with for-sale housing rising annually for three straight months, according to Realtor.com.

Now the question is, will the market keep cooling? Or will the newfound inventory dry up? Here’s what buyers should know looking forward in 2022.

The market is changing fast, agents say

While interest rate growth hurt already-strained home buyer affordability, it helped cool off the market. With fewer buyers competing, it’s allowing inventory to recover and available listings are sitting for sale longer.

Van Welborn, Phoenix real estate agent at Redfin

“We’ve been so used to 3% and 4% rates, it shocked everyone when they went to 5.5% and 6 percent. Phoenix grew from 4,000 listings on average to 18,000, but it leveled off the last few weeks. That’s a teller that buyers are entering the market again. I think since it’s not front and center in the news, people are getting accustomed to it.”

Pam Lewis, Raleigh real estate agent at Redfin

“Inventory is still an issue but the shift we’ve seen in the past two months has been drastic. No one could wrap their heads around just how much buyers pulled back and they’re being a lot more selective. Homes were selling within the first three days a few months ago, now they’re sitting for three weeks on average. Rates are definitely impacting that.”

“Inventory is still an issue but the shift we’ve seen in the past two months has been drastic. No one could wrap their heads around just how much buyers pulled back.”

–Pam Lewis, real estate agent, Redfin

Cities with the biggest housing inventory gains

Increased home inventory can provide welcome relief for home buyers, helping lessen competition and the extreme price hikes that often come with bidding wars.

Nationwide, active home listings climbed 30.7% year-over-year in July. While that’s a huge increase, it pales in comparison to some of the country’s major cities.

Cities with the biggest housing inventory gains (July 2022)

Source: Realtor.com Monthly Housing Trends Report

Among the 50 largest U.S. housing markets, those in the West and South had the largest jumps in active listings at 72% and 55%, respectively. That’s compared to about 12% in the Midwest and 4% in the Northeast.

Individually, the metropolitan areas with the highest spikes broke triple digits. Houses for sale in Phoenix shot up by 159% from July 2021. Austin, Texas followed closely behind at 155%, then came 138% in Raleigh, N.C., and 122% in Nashville, Tenn.

On the flip side, five metros saw for-sale homes decline annually in July. The drops came in Hartford, Conn. (-17.3%), Chicago (-8.2%), Virginia Beach, Va. (-6.7%), Rochester, N.Y. (-5.8%), and Milwaukee (-5.7%).

Will home inventory keep increasing?

Total housing inventory increased each month from May to July, cresting at a record of 30.7%, according to Realtor.com. But despite the overall growth and homes sitting on the market longer, the number of new listings actually slowed down in July.

As last year’s frenzied marketplace subsides, the question becomes whether home buyers should get used to a cooling market or if this will be merely a blip on the radar.

Danielle Hale, chief economist at Realtor.com

“The number of homes on the market increasing is driven by two factors: more homeowners deciding it’s a good time to sell and buyers growing choosier and pausing their search because their budgets don’t work with higher prices and higher mortgage rates.

The buyer moderation is likely to continue. But we may not see as much participation from homeowners deciding to sell going forward. That’s something we’ve got our eye on, and will be a big determinant of whether or not this trend continues.”

“If interest rates stay in this range-bound environment, between 5% and 6%, that’ll help keep the market cooled.”

–Paul Buege, CEO and president, Inlanta Mortgage

Paul Buege, chief executive officer and president at Inlanta Mortgage

“I think we’re going to see this sideways flow, where inventory continues to improve but not dramatically. If interest rates stay in this range-bound environment, between 5% and 6%, that’ll help keep the market cooled.

Brian Koss, executive vice president at the Mortgage Network

“We don’t see it grossly continuing because we don’t have distressed sales. That really affects inventory. We see a lot of sellers and buyers both holding out and that’s why transaction volume is low. That’s the poker game that’s starting now. It’s a Cold War kind of atmosphere. Everyone’s just waiting to see who will blink first.”

Could the seller’s market transition to a buyer’s market?

More inventory is still needed in order for the pendulum to swing towards home buyers. Where the available housing supply goes will depend on the amount of new sellers who list their properties and how the current sellers react to market conditions, according to Hale.

Paul Buege, chief executive officer and president at Inlanta Mortgage

“I think a couple things are going to chill the market and continue to improve it in favor of buyers. With the talk of recessions and slightly higher interest rates, it should take some of the energy out and start chipping it back towards a more normalized market. But I think this would have to be fairly significant and stay that way for some time.

Danielle Hale, chief economist at Realtor.com

“We would need to get back to what we saw just before the pandemic. The housing market wasn’t perfectly balanced, but certainly much closer to balance than it is now. We’re still down about 44% [in available listings] from July 2019.

We still have a long way to go to get back to that level nationwide. Some of the markets with the biggest year-over-year inventory increases are back to those 2019 levels. So some areas of the country are getting back to balance.”

Van Welborn, Phoenix real estate agent at Redfin

“I’m having buyers come in well under asking, seeing a lot of price reductions, and I’m starting to ask for home warranties and get them from the seller. We need maybe 5,000 more listings, but I think it’s becoming more of a balanced market for buyers to ask for things they want.”

Advice for first-time home buyers in today’s market

Even as property listings rise, borrowers could use a hand in navigating the real estate market. Successfully buying a home takes preparation, planning, locking in your mortgage, and possibly getting creative. For today’s borrower, being strategic in your financing and bidding can go a long way.

As always, a lender or real estate professional can help keep you updated on the latest developments in your market and what it could take — and what’s unnecessary — to get an offer accepted.

Brian Koss, executive vice president at the Mortgage Network

“Build a budget of what you can afford per month. You don’t want to be in an uncomfortable situation so find your level and live your life on that payment. Get a good lender that will run through all the scenarios with you, including how much work a property needs.”

Van Welborn, Phoenix real estate agent at Redfin

“Look at adjustable-rate mortgages (ARMs), because they’re good deals with some lenders. That would help [you] be able to refinance later if interest rates level off or go down. Also, look at up-and-coming areas because there’s only so much land. Plus, a lot of those areas are really attractive right now, especially to investors.”

Pam Lewis, Raleigh real estate agent at Redfin

“In most cases, first-time homebuyers face the challenges of a limited budget since they don’t have equity from another home to put into the transaction. They’re also in competition, not just with other first-timers at the same price point, but also with investors.

Quick closes, cash offers, and putting more down helps but that’s hard. We are counseling buyers to look outside of where they initially wanted. Yes, that impacts your commute, but you’re going to probably get a little less competition and be able to find what you’re looking for within your price point than if you stayed within the city center.”

The bottom line

More housing inventory will always be a welcome sight for borrowers. Aside from a wider selection of homes to potentially buy, it spreads out the competition and, in turn, slows price appreciation.

Figuring out your budget, financing, and timeline are all key in the home buying process. And whether you find the right house now or in 2023, there’s never a bad time to be a homeowner.

If you’re ready to take the next step, reach out to a local lender and real estate agent to talk about your home buying options.